Judge Approves Stockton Eligibility Over Creditor Objections, But Puts CalPERS in the Spotlight

April 1, 2013 – In The News

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Judge Chris Klein of the Eastern District of California approved Stockton’sbid for bankruptcy eligibility, making it the largest city ever to earn court protection as it plots out a plan of debt adjustment.

In his decision, Klein said that the issue of CalPERS’ status as a creditor is not at play in the determination of eligibility. But he said that confirming a plan of adjustments – which effectively outlines how creditors will be treated – will require all creditors to be treated fairly, including CalPERS.

“He sent a message that CalPERS is part of the mess,” said Michael Sweet, who is closely watching the case because of its repercussions for other Golden State municipalities. “It was part of the problem and it will have to be part of the solution.”

One of the major questions at hand is whether federal bankruptcy code supersedes the state contracts clause that created CalPERS and prohibits participating municipalities from impairing the pension fund. In an aside during his decision, Klein noted that bankruptcy code has supremacy over state law, but did not apply it directly to CalPERS. In a tangent, he also referred to CalPERS as a “garden variety creditor,” but didn’t linger on what that meant.

Klein noted that there is no immediate solution for how CalPERS would be treated as a creditor, adding that the question of whether and how costly retirement benefits could be clawed back would have to wait until a plan of adjustment. Unless an agreement can be negotiated in the meantime, that kicks the can on the key showdown between CalPERS and the capital markets creditors.